Credit Scoring Using Machine Learning

For financial institutions and the economy at large, the role of credit scoring in lending decisions cannot be overemphasised. An accurate and well-performing credit scorecard allows lenders to control their risk exposure through the selective allocation of credit based on the statistical analysis of historical customer data. This work identifies and investigates a number of specific challenges that occur during the development of credit scorecards. Four main contributions are made in this work.

First, we examine the performance of a number supervised classification techniques on a collection of imbalanced credit scoring datasets. Class imbalance occurs when there are significantly fewer examples in one or more classes in a dataset compared to the remaining classes. We demonstrate that oversampling the minority class leads to no overall improvement to the best performing classifiers. We find that, in contrast, adjusting the threshold on classifier output yields, in many cases, an improvement in classification performance.

Our second contribution investigates a particularly severe form of class imbalance, which, in credit scoring, is referred to as the low-default portfolio problem. To address this issue, we compare the performance of a number of semi-supervised classification algorithms with that of logistic regression. Based on the detailed comparison of classifier performance, we conclude that both approaches merit consideration when dealing with low-default portfolios.

Third, we quantify the differences in classifier performance arising from various implementations of a real-world behavioural scoring dataset. Due to commercial sensitivities surrounding the use of behavioural scoring data, very few empirical studies which directly address this topic are published. This work describes the quantitative comparison of a range of dataset parameters impacting classification performance, including: (i) varying durations of historical customer behaviour for model training; (ii) different lengths of time from which a borrower’s class label is defined; and (iii) using alternative approaches to define a customer’s default status in behavioural scoring.

Finally, this work demonstrates how artificial data may be used to overcome the difficulties associated with obtaining and using real-world data. The limitations of artificial data, in terms of its usefulness in evaluating classification performance, are also highlighted. In this work, we are interested in generating artificial data, for credit scoring, in the absence of any available real-world data.